Thank you for the efforts of the
Reserve Bank in preparing the above paper. It is a most
helpful contribution to the discussions currently underway
with respect to housing affordability, urban regulatory
issues and the impacts on the wider economy. It needs to be
noted too, that the Reserve Bank under your leadership and
that of your predecessor Dr Brash, has over a long period
made a substantial contribution to this issue.

The purpose
of this letter is to provide you with the perspective of a
property practitioner. I am not an economist and you will
note that often throughout this letter, I will not
necessarily use economist’s language, but simply that of a
practitioner. Some of it will be “property slang” and
indeed be rather direct. You will no doubt be aware that the
writer was the instigator and co author with Wendell Cox of
St Louis, Illinois, USA of the Demographia International
Housing Affordability Survey www.demographia.com. The Second
Annual Survey was released 23 January this year and to date
around 165,000 have been downloaded. Interestingly, some
eight months following release, it is still being downloaded
at the rate of approximately 4000 per week. There was a huge
voluntary effort put in to the second Survey by Mr Cox and
myself.

THE NEED FOR SPECIALIST URBAN ECONOMISTS

I am
strongly of the view that we do not currently have any
skilled urban economists in New Zealand and Australia. A
view incidentally shared by a good number of economists I
know as well. This is rather surprising when one considers
that our urban areas are – or at least should be – the
powerhouses of our modern economy. In large measure I think
this is due to “planners” to date being seen as the
“urban experts”. I am pleased to say though that this is
changing very rapidly as more Think Tanks, economists and
other professionals internationally with robust training
(unlike planners) are now taking a keener interest in urban
issues. Before too long – I am sure that we will see these
people dominate these issues – and the planners themselves
will either embark on sound retraining or find something
else to do. This comment may at first sight seem a little
harsh, but the reality is that the planning profession has a
lot to answer for, with respect to the massive
environmental, social and economic damage it has inflicted
on our urban areas over the past twenty years or so. I will
expand on this issue of “education” further through this
letter.

In fact we are only at the early stages of
researching and learning more about the massive damage
created by the land use regulatory administration we have
endured for more than twenty years now. As a practitioner, I
am keenly aware of most of the “self inflicted” problems
and it is particularly pleasing to me to see the rapidly
expanding interest by properly trained professionals
(including economists) in the issues we are dealing with. We
have a saying in the development game “If you get the land
wrong – the rest of its wrong”. It would be fair to say,
I think, that the significance of this statement is becoming
more widely understood.

THE IMPORTANCE OF THE DEMOGRAPHIA
SURVEY

The Demographia Survey with the median multiple
approach is hugely important. What surprises me somewhat is
why this approach was not taken well before now and further
to this, why it was necessary for a global demographer and
transportation expert of Illinois, USA and a commercial
property developer from Christchurch, New Zealand, to get
one underway. Yet the “property professionals” persisted
in generating technically unsound Housing Affordability
Indexes for years. I wonder if much of this was deliberate,
so that the structural problems of the property sector were
effectively masked.

The Demographia Survey is important
for the following reasons. Firstly, the median household
income and median house prices are shown, so that they can
be scrutinised and questioned if need be. Secondly, the
latest Survey clearly illustrates that most urban markets
within the countries surveyed were affordable or near
affordable twenty years ago and that twenty four North
American urban markets are currently affordable. Thirdly, we
ensured that this was broken down in to categories of
affordability – such as affordable, moderately
unaffordable, seriously unaffordable and severely
unaffordable. This is important (as we explain within our
endnotes) as the statistical information cannot be
considered “precise” and therefore it is more
appropriate to be talking in terms of “categories of
affordability”.

WHAT SHOULD HOUSING BE WORTH?

We know
housing in New Zealand is around a multiple of 6.0, in the
range of “severely “unaffordable”, whereas it should
really be in the range of 2.5 to 3.0 throughout the building
cycle. May I suggest that the Reserve Bank consider using
the median multiple as a base, to gauge the extent of the
problem we are now dealing with. Let’s use the median
multiple of 2.8 as an adequate midpoint. With a housing
stock of around 1,400,000 and an overall wealth (your Report
Table 2 – 2005 figures) of $506 billion, this would
indicate that the average price is around $361,000 and the
median, around $300,000. At a median multiple of 2.8 instead
of the current 6.0, this would suggest that household wealth
should be around 46% of what it is currently. That is,
instead of $506 billion, it should be in the order of $234
billion – some $272 billion less than what it is. This
last figure or something approximating it should not be
considered “wealth” – but simply what it is –
“inflation”.

If there is any relationship between
housing wealth (really wealth and inflation in New
Zealand’s case) check back through Table 2 of your Report
when the housing wealth of New Zealanders was at or near
$234 billion. We would need to go back to 2000, where the
total New Zealand house values were $231 billion.
Interestingly at that stage total household liabilities
(mortgages and other household debt) were $78 billion
whereas within a very short period of 5 years - in 2005 this
had exploded out to $142 billion – some $64 billion higher
than the 2000 figure. Even with lower interest rates and a
more buoyant global economy, one wonders if at least $40
plus billion of this household debt, has been needed to
“fuel” the “artificial land scarcity boom”. It would
appear so – if the movements’ in house wealth and
household liabilities within the Reserve Banks Reports Table
2 is any guide – whilst the lifts through the 1990’s
were very moderate through the earlier period.

SOME
IMPACTS ON MARKET BEHAVIOUR CREATED BY ARTIFICIAL
SCARCITIES

I don’t know what the annual “churn rate”
or turnover figures are for New Zealand housing precisely,
but suspect they are in the order of 10% of the housing
stock annually. The Real Estate Institute people handle
around 75% of this I understand – the rest is sold
privately. This would suggest that around $50 billion of
residential real estate at these inflated figures is
currently being transacted annually –whereas in a normal
open market (not closed with artificial zoning scarcities
and inflated values) it should really be less than $25
billion annually. We do know for example that “churn
rates” increase where the market senses scarcities and
engages in “one way bet” speculation. In comparing our
turnover rates adjusted for population differences, with the
more open market of say Houston www.har.com , it appears
that speculative activity lifts turnover rates by at least
20% through a market upswing. Anything can happen through
the downswing. We do know that artificially inflated markets
are hugely volatile, particularly with respect to existing
and new housing construction transactions – as the grossly
inflated coastal US urban markets are illustrating at the
moment. Taking these two factors in to account, suggests
that our residential annual turnover figure, should be in
the order of $20 billion, not the approximately $50billion
it is currently.

So with these massive household debt
lifts and inflated turnover figures – no wonder the
Reserve Bank is experiencing “some difficulty” in
attempting to cool and stabilize the economy. It would be
fair to say too, that the planning community appears
oblivious to these market disruptions and
distortions.

DEGRADING THE HOUSING STOCK - DENYING THE
YOUNG HOME OWNERSHIP

Even with this land scarcity
precipitated “boom” (actually inflation) and the truly
massive amounts of additional debt and equity liquidity as
roughly outlined above, our housing stock is degrading
overall and our homeownership rates are falling dramatically
– as understandably existing homeowners are leveraging off
their inflated equity to crowd out young people trying to
enter the housing market.

In a recent speech to the Real
Estate Institute of New Zealand’s Annual Conference, the
Minister of Housing Hon Chris Carter stated that in 1991 our
home ownership rate was 74%, in 2001 68% and estimated to be
overall in the order of 65% with Auckland 61%. I suspect
that when the latest Census figures are released 9 December,
we may find that these latest estimates are too high. It
appears to me that something in the order of 0.75% to 1.0%
of our housing stock annually is going out of home ownership
to the rental market. It could well be more, as anecdotally;
I understand in Christchurch currently half the housing
stock being transacted is going in to the rental market. But
even at 1% of the housing market – this would suggest that
at least 14,000 houses a year are currently being
transferred out of home ownership and in to the rental
market. This of course is “tough luck” for those young
people being effectively shut out of the market.

REDUCED
NEW CONSTRUCTION AND POORER QUALITY STANDARDS

As I said
before, our residential stock is being seriously degraded
through this artificial inflationary process. In my research
of open North American urban markets, my sense is that –
if the annual population lift is in the range of 0.75% to
1.0% - the build rate per thousand people should be in the
order of 7 to 9 through the building cycle.

I find this
“build rate per thousand people” an extremely useful
measure – and understandably, one that is in common usage
internationally. Britain (the property / planning basket
case of the developed world) has an appalling build rate of
less than 3 per 1000. You need this build rate – or near
it - for replacement alone. One researcher (from Audacity
UK) is of the view that British housing will need to stand
up for 1,600 years at current build rates! The current size
of a new British residence is 76 square metres (in 1920 it
was 120 square meters) and projected to shrink further.
Australia’s build rate is currently at about 7, Texas
slightly higher than 9 and Houston around 13 (huge
population lift over the past 12 months – near 5% - with
Hurricane Katrina victims added in).When build rates and
house sizes are combined, my rough calculation is that
Britain is currently constructing annually, just 10% of the
residential floor space Texas is. Ireland (with average new
house sizes of just 85 square meters) at this stage is
something north of 20, where a land supply induced
speculative frenzy is playing itself out. My view is that
Ireland will pay a huge price before long for adopting the
failed British planning system.

The Texas markets are an
excellent gauge as they are “open” and don’t engage in
land supply strangulation, as is the case here in New
Zealand, Australia, Britain and Ireland. Dr Alan Moran of
the Australian Institute of Public Affairs ( www.ipa.org.au
) provided some excellent comparative information with
respect to Texas and Australia in his recent Report “The
Tragedy of Planning” launched mid August by the Federal
Treasurer Hon Peter Costello.

You will no doubt be aware
of the recent public statements by Prime Minister Howard and
the retiring Governor of the Reserve Bank of Australia Ian
Macfarlane. The three have sheeted the blame for the housing
affordability crisis on strangled land supply. There is
currently much progress at States level, as this “core
problem” is being increasingly recognised.

Our current
build rate is in the order of 6 and bounced around 5 and
lower through much of the 1990’s – well below where it
should have been in to 7 to 9 range. With the current
population, our annual build rates should move between
28,000 to 36,000 residential units per annum. Currently it
is around 24,000 and falling. Through much of the 1990’s
annual residential unit construction was approximately
20,000 with a very low point of 12,000 through the early
part of the 1980’s. The high point for New Zealand was
1975, when 35,000 residential units were put in place
(40,000 consents that year) – with a build rate I guess of
about 12 per 1000.

Approximately 1% or 14,000 of our
housing stock should be demolished each year and replaced
with good quality stock. This hasn’t been happening of
course, as it only takes simple observation to know that
most of our housing stock is of inferior quality with, for
example, extremely poor thermal standards.

Regrettably,
due to artificially inflated urban land prices – even our
new housing stock is of an inferior standard. In general
terms “development ratios” should be in the order of 1:4
where around 25% goes towards the land, with the balance to
construction. Due to the inflated land costs it is now 1:1
where around 50% goes to land and the balance
construction.

NEW ZEALAND HAS ABUNDANT LAND

The huge
volume of reputable international research on this issue
identifies land supply strangulation as the core problem.
Although planners have convinced themselves that we are
“running out of land” – the reality is the opposite of
course. Well less than 1.4% of our land area is urbanised
and the writers research (as outlined in recent
communications to the Housing Minister and CHRANZ) is that
we would at best only require an additional one hundredth of
one percent of our land area each year for urban
development. Is it really an issue if we urbanise say 2 to
3% of New Zealand? Of course it’s not even an issue.

The
UN population projections suggest that the world population
is likely to go in to decline soon after 2050. As we all
know the global battle for labour is growing in intensity
each year.

THE URGENT NEED TO START UNRAVELLING THE
MESS

Put rather simply – we have spent around 20 years
creating this mess – and I would suggest – we spend the
next 10 years unravelling it. Sadly many young people today
on moderate and low incomes will be denied homeownership
with this approach. Local Government and the NZ Planning
Institute need to recognise the great harm that has been
done to these young people’s lives and most importantly,
clearly understand that they have a public duty to assist in
“righting this wrong”.

The reality however is that
this “mess” cannot be unravelled any more quickly,
without creating further disruption and hardship. It must be
done in a measured and responsible way to allow time for
people to adjust and I have suggested to the Minister of
Housing that Local Authorities be required to meet Housing
Affordability Targets on a phased basis over a ten year
period. This idea is very much a “copy” of the “Social
Sustainability Goals” Ken Bone of the NSW Department for
Housing is urging Local Authorities to put in place in that
State.

NEED FOR IMPARTIAL AND RIGOROUS TRAINING OF
REGULATORS

The other key idea I am very keen to see
followed up on is with respect to education where “Land
Use Law Schools” are set up between our current Economics
Schools and Law Schools of our tertiary institutions –
with a focus on “rigor” and “impartiality”. Again,
this issue is covered within my recent communications with
the Minister and CHRANZ. It is to be hoped that the issue
will be discussed further at the Annual Resource Management
Law Association Conference “Pathways to Sustainability”
to be held in Auckland 5 to 7 October, where the co author
of the Demographia Survey, Wendell Cox is a keynote speaker.
The Local Government Housing Affordability Summit is to be
held in Wellington 30 October and information with respect
to this event, is to be released this week. The Housing
Minister will be a key speaker.

It would be much
appreciated Dr Bollard if the Reserve Bank could further
research this issue and where appropriate, explore aspects
of it by employing the approaches as outlined within the
early part of this letter.

There is an urgent need for a
Demographia type median multiple survey of all our Local
Authority and urban areas so that we have a better
understanding of the degrees of housing stress within
individual communities. Mr Terrence Aschoff, Manager of
CHRANZ has been most helpful in this regard and intends to
put the idea forward for “serious consideration” within
the 2007/8 budget year process. However – we really do
need this survey to get underway as soon as possible and
would be grateful if the Reserve Bank could consider
assisting CHRANZ with respect to the funding for this work.
This should be a small, low cost project.

With regard to
the Annual Demographia Survey, we assemble the end of
September data of all the countries surveyed. This
information is generally available by early to mid December
of each year. It would be most helpful if a New Zealand
“median multiple” survey could be released at the same
time late January at the time of the Demographia Survey
release.

Once again, many thanks for the valued research
work you and the people at the Reserve Bank are doing, by
assisting us all in moving this issue forward. I am
particularly heartened by the commitment and leadership of
Hon Chris Carter, our Housing Minister and the constructive
contributions the other political parties I am dealing with
are making with respect to this issue too. Particular
mention must be made of the Local Government leaders such as
Mayor Bob Harvey of Waitakere and Mayor Barry Curtis of
Manukau. I am also most impressed with the commitment by
CHRANZ and their consultants from Motu and DTZ as well.

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